Safe Harbor Strategies for Securing the Solar Investment Tax Credit

Update: The Inflation Reduction Act of 2022 extended the federal solar tax credit. It will remain at 30% through 2032. Learn more here.

Publish Date: May 18th, 2020

Since it was enacted in 2006, the solar Investment Tax Credit (ITC) has helped support the growth of solar energy across the country. Both homeowners and commercial property owners are able to recoup 26% of the solar system price, improving the economics of a solar investment. The tax credit is claimed on federal income taxes and can be monetized the first year after system operation. It is scheduled to step down after 2022 and will sunset completely for residential systems after 2023, while remaining at a permanent 10% for commercial systems.

For homeowners, the guidelines are clear that they need to have their system installed and placed in service by the end of the 2022 to be eligible for the 26% ITC. Commercial entities, however, can secure this year’s higher tax credit by safe harboring their project. This blog post will cover the concept of safe harbor and how Namaste Solar can help commercial projects preserve the 26% tax credit before it decreases to 22% in 2023.

What is Safe Harbor?

The IRS established a provision to the ITC tax law called safe harbor which allows customers to preserve the tax credit of a given year by beginning construction on a solar project. The definition of what beginning construction means is at the heart of safe harbor and is what a prospective solar buyer should be aware of in considering a safe harbor strategy. There are two approaches that qualify as beginning construction: The first safe harbor mechanism is to incur 5% of total project cost, and the second is to begin physical work of a significant nature on a project.

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"Both are considered acceptable proof of beginning construction and demonstrate that work has been initiated."

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Incur 5% of Total Project Cost

The Five Percent Safe Harbor Test requires at least 5% of the price to be incurred on qualifying equipment such as solar modules, racking, and inverters. The requirement for this varies based on the accounting method of the project owner, and in general, title transfer of equipment must occur within the given year to qualify. While 5% is the minimum required, Namaste Solar recommends purchasing the solar panels for a project, which accounts for a larger percentage of the cost. This allows you to lock in pricing for your panels and is often the cleanest way to achieve safe harbor.

Begin Physical Work of a Significant Nature

Physical work of a significant nature refers to evidence that work has started on something qualitatively significant. Both on-site and off-site work is considered acceptable, and can be performed by the project owner, a contractor, or a subcontractor. Either way, a binding contract must be in place that demonstrates the owner’s assumption of risk. This option also refers to the procurement of components specific to the project which are not normally held in the manufacturer’s inventory, such as custom racking, carports, and transformers. Assuming the work performed is of a significant nature, there is no fixed minimum amount of work, monetary amount, or percentage threshold required to satisfy the physical work test.

Namaste Solar Can Safe Harbor Your Project

The best safe harbor strategy will depend on the individual characteristics of your project. Namaste Solar can help evaluate your options and determine which strategy is the best course of action to ensure you secure the maximum possible tax credit for your project. We successfully achieved safe harbor for 4 projects in 2019, assuring our clients could maximize their tax benefit. Contact one of our non-commissioned solar experts today to start a conversation.